Lower rates in realty

Price reduction is likely to be more pronounced in new projects than in those under construction.

Moumita Bakshi Chatterjee

Hit by slowdown blues and a massive credit crunch, real estate players are biting the bullet and lowering prices on new and existing residential projects.

Recently, DLF Ltd reduced rates by 20 per cent on two ongoing projects — OMR Chennai and New Town Heights, Gurgaon. Market watchers believe that the move could prompt others to follow suit.

For instance, Omaxe says it has dropped prices by nearly 15 per cent, but only for new projects (Vrindavan, in Allahabad and Indore, is a case in point).

While the company insists it has not “reduced” rates on existing projects, it admits to offering a 5-10 per cent discount to customers who pay instalments on time.

Price correction

Overall, the real estate prices have corrected by 25-40 per cent over the last six months. With funds drying-up from investors, speculators, PE and banks, realtors realise that the funds are only available with end-users, who, in turn, are looking at value for money, says Mr Anuj Puri, Managing Director, Jones Lang LaSalle Meghraj.

DLF came under media glare recently when it slashed prices for its Chennai and Gurgaon projects. Besides this, the company has also launched two more projects at “lower prices” in Bangalore and Hyderabad — against the initially intended price of nearly Rs 3,000 per sq.ft, it has now announced a rate of Rs 2,200-2,300 per sq.ft, says a DLF official.

“In the case of existing projects, there was consumer demand for bringing the rates down. However, in the case of the upcoming projects, there had been an apprehension that the sales could get hit on account of two factors — consumer worry over future cash flows, and their expectation that prices will fall in future. By reducing the rates, we have been able to infuse demand and address these two concerns,” the official adds.

According to DTZ, the last 3-6 month period has seen a 10-15 per cent price correction across the Delhi NCR micro-markets. “The correction has been more pronounced in the peripheral locations of Delhi NCR. There is a correction of 10-15 per cent on the quoted values,” a DTZ representative said.

New projects cheaper

Analysts feel that the price reduction is likely to be more pronounced in the case of new projects than those under construction and nearing completion. This is because on existing projects the end-user is sure on delivery timelines. For new projects, customers are discounting the risk of delivery, analysts opine.

So have the residential prices finally bottomed out? No one really can tell for sure. Naturally, most players claim that the prices are unlikely to tank further. According to Mr Rohtas Goel, CMD, Omaxe, “So far the lack of demand in the market has forced the real estate companies to announce price drops, but I do not think that there is any further scope. Builders cannot afford to cut rates, going forward.”

Agrees Mr Puri of Jones Lang LaSalle Meghraj. “In many cases, I feel that the prices have touched the bottom. For instance, in Gurgaon where rates were initially pegged at Rs 6,500-7,000 per sq.ft, they have now come down to Rs 3,250 per sq.ft. I believe that where the prices have hit the year 2005-range, there is no scope for any more reduction now,” he points out.

In fact, there are cases where builders are going all out to win customer confidence by offering ‘price guarantee’ of sorts. This essentially means that if a builder decides to cut rates on a particular project for the unsold inventory, he would cough-up the differential to its old customers who may have shelled-out more for the same project initially.

This guarantee is being offered only in cases where the builder is reasonable sure that the prices won’t come down in a hurry.

Assured value

Lodha Group, for instance, is offering “best value guarantee” scheme to its luxury housing project customers in South and Central Mumbai. “This is aimed at building customer confidence in the project,” says Mr Abhishek Lodha, the company’s director.

Mr Lodha admits that the new pricing in overall real estate sector is reflecting the market reality. “In our eight new projects, the prices have been pegged 15-20 per cent lower than what they would have been, say, a year ago,” he adds.

(This article was published in the Business Line print edition dated April 5, 2009)

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